depreciation and the cashflow statement


2 Answer(s)


Depreciation expense is a non-cash item. It means that the amount of cash is actually not spent.In case of a cash flow statement, this non-cash item has to be added back under operating activity. If this is not done, then we won't get the ending cash in cash flow statement correctly. We will get a value lesser than the actual amount.

Whether you are running a multinational corporation or a small company you must track profitability and cash flow separately.
To better analyze available cash, you must prepare a cash-flow statement, which consists of three sections: cash flow from operations, investing activities and financing activities.

Failure to add depreciation expense to the profitability figure when preparing a cash-flow statement will result in an erroneous cash-flow figure. Even though depreciation is a legitimate expense and must be recognized, it is not a cash outlay. Therefore, the cash position of the company must be greater by that amount than is indicated by the profitability figure alone. Keep in mind that neither cash flow nor profitability tells the whole story about a company. Healthy companies must generate both sufficient cash, as well as enough profits to survive over the long run. High profits but low or negative cash flow can result in an inability to pay upcoming bills. The opposite means that the company is generating cash, but, over the long run. cannot keep this up unless it starts to generate profits as well.